1st Quarter Results- Part 1

Telefonica SA 17 May 2005 Quarterly results January-March 2005 TABLE OF CONTENTS Telefonica Group Financial Highlights Consolidated Results Financial Data RESULTS BY BUSINESS LINES Fixed Line Business â€¢ Telefonica de Espana Group â€¢ Telefonica Latinoamerica Group Mobile Business Other Business â€¢ Directories Business â€¢ Terra Networks Group â€¢ Atento Group â€¢ Content and Media Business â€¢ Telefonica Deutschland Group AddendA Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events Changes to the Perimeter and Accounting Criteria of Consolidation This document contains financial information/data reported under IFRS. These data are preliminary, as only full compliance with International Financial Reporting Standards issued at 31/12/2005 is required, unaudited, and thus, being subject to potential future modifications. This financial information has been prepared based on the principles and regulations known to date, and on the assumption that IFRS principles presently in force will be the same as those that will be adopted to prepare the 2005 full year consolidated financial statements and, consequently, does not represent a complete and final information under these regulations. In addition, the IFRS financial information contained herein may not be comparable to financial information published by Telefonica that was prepared under Spanish GAAP. The English language translation of the consolidated financial statements originally issued in Spanish has been prepared solely for the convenience of English speaking readers. Despite all the efforts devoted to this translation, certain omissions or approximations may subsist. Telefonica, its representatives and employees decline all responsibility in this regard. In the event of a discrepancy, the Spanish-language version prevails. These consolidated financial statements are presented on the basis of accounting principles generally accepted in International Financial Reporting Standards (IFRS). Certain accounting practices applied by the Group that conform with generally accepted accounting principles in IFRS may not conform with generally accepted accounting principles in other countries. TELEFONICA GROUP TELEFONICA GROUP ACCESSES Unaudited figures (thousands) January March 2005 2004 % Chg Fixed telephony accesses (1) 37,713.9 37,410.4 0.8 Internet and data accesses 11,400.8 9,870.4 15.5 Narrowband 5,551.3 6,206.4 Broadband 5,214.1 3,203.9 ADSL (2) 4,847.8 2,981.1 Retail (3) 3,524.9 2,251.2 Other accesses (4) 635.5 460.2 Unbundled loops (5) 193.4 24.1 Pay TV 441.4 384.7 14.7 Cellular accesses (6) 81,438.2 54,192.4 50.3 Total Accesses 130,994.2 101,857.9 28.6 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access x30; 2/6 Access. Company's accesses for internal use included. (2) T Deutschland's connections resold on a retail basis and Cable Modem in Peru included. (3) TdE Retail includes satellite. TASA Retail includes ISP in the north part of the country. (4) Cable modem El Salvador, WiFi clients, satellite Latam, fiber and leased circuits included. (5) Includes fully unbundled loops and shared loops. (6) Since the cancellation of Movistar Puerto Rico's management contract in September 2004 , its subscriber base is excluded from the Group subscriber base. TELEFONICA GROUP Financial Highlights The most relevant factors of the Telefonica Group 2005 first quarter results are the following: â€¢ Solid operating growth, with revenues increasing by 16.7% from the first quarter of 2004: â€¢ Improvement through all business lines, with the cellular business (+34.6%), Telefonica de Espana Group (+6.0%) and Telefonica Latinoamerica Group (+4.5%) standing out. â€¢ Both Operating Income before D&A (OIBDA) and Operating Income (OI) increased by 16.2% and 25.5%, respectively, from January-March 2004. â€¢ Organic1 growth in Revenues, OIBDA and OI would have been +9.2%, +9.5% and 21.3%, respectively. â€¢ Strong growth in the cash generation coupled with profitability, despite intense commercial efforts: â€¢ Operating free cash flow (OIBDA-CapEx) reached 2,670.7 million euros, with a year-on-year increase of 15.2%. â€¢ Consolidated OIBDA margin of 41.2% vs. 41.4% a year ago. â€¢ Consolidated net income of 912.2 million euros, 35.9% more than the one obtained the previous year: â€¢ Earnings per share amounted to 0.184 euros as of March 2005, in comparison with 0.135 euros in the first three months of 2004. â€¢ Total accesses reached 131.0 millions (+28.6% year-on-year), reflecting the strong commercial activity: â€¢ Cellular accesses increased by 50.3% to 81.4 million. â€¢ Retail ADSL accesses amounted to 3.5 million from 2.3 million a year ago. ------------------------ 1 Assuming constant exchange rates and includes the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from 1 January 2004. TELEFONICA GROUP Consolidated Results The results obtained by Telefonica Group and the management report included in this report are based on the actions carried out by the various business units in the Group and which constitute the units over which management of these businesses is conducted. This implies a presentation of results based on the actual management of the various businesses in which Telefonica Group is present, instead of adhering to the legal structure observed by the participating companies. In this sense, income statements are presented by business, which basically implies that each line of activity participate in the companies that the Group holds in the corresponding business, regardless of whether said holding has already been transferred or not, even though it might be the final intent of Telefonica, S.A. to do so in the future. It should be emphasized that this presentation by businesses in no case alters the total results obtained by Telefonica Group. These results are incorporated from the date of effective acquisition of the holding. The results of the Telefonica Group during the first quarter of 2005 were characterized by the solid growth and profitability of operations despite the intense commercial activity (revenues up 16.7% and Operating Income before D&A up 16.2%), and the higher operating cash flow generated (OIBDA-CapEx up 15.2%). As a result, net income amounted to 912.2 million euros, up 35.9% in relation to the same period of 2004. As of 31st March, 2005, Telefonica Group had 131.0 million of total accesses (fixed telephony accesses, Internet and data accesses, Pay TV and cellular accesses), 28.6% more than in March 2004. If we include the Cesky Telecom's accesses, total accesses would amount to 140.0 million. Cellular accesses were the highest contributor to this evolution, ending the quarter with a managed customer base of 81.4 million (+50.3% year-on-year), adding 3 million new customers in the first quarter 2005. Of the total customer base, 59.1 million corresponded to the Latin American operators, 19.1 million to Telefonica Moviles Espana and 3.2 million to Medi Telecom (Morocco). Retail ADSL accesses in Spain and Latin America totaled 3.5 million as of March 31st, 2005, a year-on-year growth of 56.6%. Telefonica Group retail ADSL acceses in Spain totaled 2.1 million (+43.2 vs. March 2004), representing an estimated market share of 54.2% of total broadband market. Retail ADSL accesses in Latin America amounted to 1.5 million, compared with 815,268 a year ago. Among Latin America operators, it should be mentioned Telesp , with 880,183 retail ADSL accesses (+69.9% year-on-year). Revenues amounted to 8,278.8 million euros during the first three months of 2005, a 16.7% increase over the same period of the previous year due to the general growth of all business lines, specially the cellular business, thanks to the incorporation of the Latin American operators acquired to BellSouth. The negative impact of exchange rates deducted only 0.6 percentage points from the revenues growth rate, while variations in the consolidation perimeter added 8.1 percentage points. By companies, the cellular business, the main contributor to the Group's growth, registered revenues of 3,675.9 million euros, which was 34.6% higher than that recorded in the first quarter of 2004 (variations in the consolidation perimeter1 accounted for 25.5 percentage points of the growth rate), supported by the positive performance of service revenues (+36%). Likewise, revenues from handset sales also progressed well (+25%). By countries, it's worth to highlight the solid evolution of operations in Spain, Venezuela, Argentina and Colombia. ------------------------ 1 Includes the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from 1 January 2004. The Telefonica de Espana Group, the second largest contributor to the Group's growth, recorded revenues of 2,842.0 million euros during the first quarter of 2005, 6.0% higher than in January-March of the previous year. This performance in sales is due to the contribution of Broadband revenues (+48.3% year-on-year), driven by the higher ADSL client base, and, to a lesser extent, the contribution of Traditional Business revenues (+4.1% year-on-year). Revenues from the Telefonica Latinoamerica Group, the third largest contributor to the Group's growth, amounted to 1,735.2 million euros during the first quarter of this year to record a 4.5% growth in current euros with regard to the same period of the previous year. In constant euros, this increase is reduced to 3.4%, because of the positive effect of the variation in the exchange rates. This variation was primarily due to Telesp and TASA, whose revenues increased by 3.2% and 11.4% respectively in local currency, although the positive progress of TEA and TIWS (+6.1% and +29.5% in constant euros) must also be noted. By geographic areas at the end of the quarter, Spain accounted for 56.6% of the Group's revenues, down 5.3 percentage points year-on-year as a result of the increased contribution from Latin America following the acquisition of the BellSouth Latin American operators (39.7% vs. 33.4% at March 31st 2004). In the Latin America region, it's worth to highlight Venezuela, which accounted for 3.2% of total sales in comparison with the 0.04% a year ago, Colombia (+1.9 percentage points to 2.0%) and Argentina (+1.1 percentage points to 5.0%). Brazil accounted for 16.6%, compared with 17.5% twelve months ago. Similar to previous quarters, operating expenses reflected the aforementioned commercial efforts in the main business lines and the incorporation of BellSouth assets. Hence, there was a year-on-year increase of 18.2% to total 4,993.6 million euros during the first quarter of 2005. According to the breakdown of expenses, the performance was as follows: â€¢ Supplies expenses grew by 25.2% in relation to January-March 2004 (26.4% excluding the forex effect), primarily due to the purchase of equipment for ADSL and Imagenio services by the Telefonica de Espana Group and the purchase of handsets and variations in the consolidation perimeter in the cellular business. â€¢ Personnel expenses increased by 2.1% due to the trend in the average workforce. The average workforce for the first three months of the year stood at 176,891 employees, an increase of 27,087 people. This 18.1% growth is due to the sharp increase in the Atento Group workforce (+37.4% year& ndash;on-year). Excluding the Atento Group, the workforce grew by 6.8%, because the layoffs carried out at Telefonica de Espana (2003- 2007 Redundancy Program) cannot offset the increase in employees from BellSouth Latin American operators. In addition, a provision of 121.3 million euros associated to the acceptance of 398 layoffs from the 1,750 requests received to join the 2003-2007 Redundancy Program has been accounted for. â€¢ External services grew by 24.8% (+25.5% in constant euros) because of the increased commercial activity, mainly by the Telefonica de Espana Group, the Telefonica Latinoamerica Group and the cellular business, which was also influenced by the changes in the consolidation perimeter. Moreover, during the quarter there was a gain on sale of fixed assets for 120.6 million euros (+26.6 million euros on January-March 2004), mainly coming from the capital gains generated by the sale of Infonet, Radio Continental and Radio Estereo, both belonging to the ATCO Group, together with the capital gain related to real estate disposal. As a result, the Telefonica Group recorded Operating Income before D&A (OIBDA) of 3,414.7 million euros in the first quarter 2005, 16.2% more than in the same period of 2004. Assuming constant exchange rates and excluding variations in the consolidation perimeter2, the OIBDA would have grown by 9.5%. The Group's consolidated EBITDA margin was 41.2%, 0.2 percentage points lower than the one registered a year ago. ------------------------ 2 Includes the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from 1 January 2004. By companies, the cellular business is the Group's biggest contributor to consolidated OIBDA growth, amounting to 1,317.9 million euros in absolute terms to represent 38.6% of total, after growing at a 16.7% rate in comparison with the first three months of 2004. The increase in commercial costs resulting from the operator's strategic efforts to capture a significant part of the growth in Latin America and to maintain its competitive position in Spain led to a 5.5 percentage point reduction in the cellular business OIBDA margin in relation to January-March 2004 to 35.9%. At the end of the first quarter, OIBDA at the Telefonica de Espana Group totaled 1,191.9 million euros (34.9% of consolidated OIBDA), a year-on-year increase of 11.9% over the same period of the previous year. The OIBDA margin stood at 41.9% in March 2005, compared with the 39.7% twelve months earlier. OIBDA at the Telefonica Latinoamerica Group stood at 852.3 million euros during the first three months of 2005 (25.0% of total OIBDA), recording a year-on -year growth of 17.9% in current euros (16.8% in constant euros). The rationalization of operating expenses by operators resulted in a 5.6 percentage point improvement in the OIBDA margin compared with the January-March 2004 period, standing at 49.1%. By geographic areas, Spain accounted for 63.1% of the Telefonica Group's consolidated OIBDA at March 31 2005, 5.6 percentage points less than one year ago due to higher contribution from Latin America (33.6% compared with 29.9% in March 2004) following the acquisition of assets from BellSouth. In this context, the increased contribution from Venezuela (3.1% vs. 0.03% in March 2004) must be noted. Moreover, contributions from Brazil in March 2005 decreased by 1.1 percentage point to stand at 17.7%. Depreciation and amortization recorded a 6.5% year-on-year growth to stand at 1,526.4 million euros at the end of the first quarter of 2005, primarily as a result of the depreciation and amortization of the cellular business (+41.4%) associated to changes in the consolidation perimeter. Consolidated operating income (OI) amounted to 1,888.3 million euros during the first three months of the year, 25.5% more than in the same period of the previous year. Changes in the consolidation perimeter2 and in exchange rates added 4.1 percentage points and 0.1 percentage points of growth, respectively. Financial expenses amounted to 317.7 million euros in the first quarter, including a positive result from forex of 62.8 million euros. As such, the effective cost measured as a percentage of total average debt for the quarter was 4.6% (or 5.5% excluding the positive income from forex). Total financial expenses dropped by 1.2% with regard to those of the first three months of 2004 estimated under IFRS, as the lower costs mostly offset the 17.5% increase in average total debt. The net free cash flow after CapEx generated by the Telefonica Group amounted to 1,164.8 million euros for the first quarter of the year. Of this, 906.3 million euros were devoted to financial investments (net of divestiture) and 224.0 million euros for net payment for dividends and treasury stock. Including the sum of 39.3 million euros received from the sale of real estate, the free cash flow after dividends available to reduce financial debt stood at 73.8 million euros. Free cash flow stood at 1,355.7 million euros (according to the criteria used at the 3rd and 4th Investor Conferences) prior to payments made to amortize commitments related to headcount reduction plan (and taking into account the almost absence of dividend payments to minority interests during the first quarter). The Telefonica Group's net financial debt at the end of March 2005 stood at 23,948.1 million euros. Most of the increase in debt was due to the appreciation of the dollar and the Latin American currencies against the euro throughout the first quarter, which accounted for 292.4 million euros of the increase in debt. Total debt (including guarantees and labour commitments for a total of 3,648.2 million euros) amounted to 27,596.3 million euros, equivalent to 2.0 times OIBDA annualized for the quarter. The negative results of associated companies recorded a year-on-year reduction of 69.1% in comparison to the first quarter of 2004 to total - 9.1 million euros (-29.5 million euros a year before). The lower losses related to Sogecable, IPSE 2000, Medi Telecom and Lycos Europe and the higher stake in Portugal Telecom explain this performance. The tax provision for the first three months of the year reached 579.9 million euros, even though the cash outflow will be more reduced for the Telefonica Group to the extent that negative tax bases obtained in previous years are offset. Results attributed to minority interest deducted 69.4 million euros from the Group's net income for the January-March 2005 period in comparison with the -45.6 million euros of the same period of 2004. The 52.2% growth in this item is justified by the lower losses at Terra Networks Group. Due to the performance of the above items, net income amounted to 912.2 million euros for the first three months of the year, a 35.9% year-on-year growth. The Telefonica Group's CapEx for the first quarter of the year amounted to 744.0 million euros, registering a 20.1% year-on-year increase, due to the higher investments made by the cellular business (+39.7%) and by the Telefonica Latinoamerica Group (+24.3%). In the cellular business, the rise in CapEx was due to the investment in BellSouth operators and the growth in Brazil and Chile. In the Telefonica Latinoamerica Group, higher investments were due to broadband development. Assuming constant exchange rates and excluding variations in the consolidation perimeter3, CapEx would have grown by 13.8% year-on& ndash;year. However, it should be noted that there is a strong cyclical component to the investment, so this performance cannot be extrapolated for the full year. ------------------------ 3 Includes the consolidation of the Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela in the cellular business and Atrium in the Telefonica Latinoamerica Group from 1 January 2004. TELEFONICA GROUP Financial Data TELEFONICA GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 8,278.8 7,093.4 16.7 Operating income before D&A (OIBDA) 3,414.7 2,937.6 16.2 Operating income (OI) 1,888.3 1,504.7 25.5 Income before taxes 1,561.4 1,153.5 35.4 Net income 912.2 671.4 35.9 Net income per share 0.184 0.135 35.9 Average number of shares (millions) 4,955.9 4,955.9 0.0 TELEFONICA GROUP RESULTS BY COMPANIES Unaudited figures (Euros in millions) REVENUES OIBDA OPERATING INCOME Mar Mar % Chg Mar Mar % Chg Mar Mar % Chg 2005 2004 2005 2004 2005 2004 Telefonica de 2,842.0 2,680.7 6.0 1,191.9 1,065.0 11.9 622.4 435.7 42.9 Espana Group Telefonica 1,735.2 1,659.7 4.5 852.3 723.0 17.9 449.6 326.4 37.7 Latinoamerica Group Cellular 3,675.9 2,730.0 34.6 1,317.9 1,129.0 16.7 790.3 755.8 4.6 Business Directories 96.2 79.7 20.7 23.9 19.0 26.0 18.1 13.8 31.3 Business Terra 113.0 105.4 7.2 14.3 1.5 n.s. (5.4) (22.9) (76.3) Networks Group Atento Group 178.7 134.4 32.9 22.6 19.2 17.8 15.5 9.8 57.8 Content & 266.5 273.8 (2.6) 45.4 43.7 3.9 38.1 37.3 2.1 Media Business Other 187.3 189.5 (1.1) (47.5) (76.4) (37.8) (65.0) (92.9) (30.0) companies (*) Eliminations (816.0) (759.9) 7.4 (6.1) 13.7 c.s. 24.7 41.7 (40.8) Group Total 8,278.8 7,093.4 16.7 3,414.7 2,937.6 16.2 1,888.3 1,504.7 25.5 (*) OIBDA and Operating Income exclude the variation in investment valuation allowances accounted for by Telefonica S.A. parent company and that are eliminated in consolidation. TELEFONICA GROUP CAPEX BY BUSINESS LINES Unaudited figures (Euros in millions) January March 2005 2004 % Chg Telefonica de Espana Group 248.5 262.6 (5.4) Telefonica Latinoamerica Group 127.5 102.6 24.3 Cellular Business 311.4 223.0 39.7 Directories Business 2.4 3.6 (31.6) Terra Networks Group 2.5 5.1 (50.1) Atento Group 4.4 2.9 51.5 Content & Media Business 8.8 5.6 58.0 Other companies & Eliminations 38.4 14.2 170.0 Group Total 744.0 619.5 20.1 TELEFONICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 8,278.8 7,093.4 16.7 Internal expenditure capitalized in fixed 87.4 88.3 (1.0) assets (1) Operating expenses (4,993.6) (4,225.4) 18.2 Supplies (2,114.5) (1,689.1) 25.2 Personnel expenses (1,298.1) (1,271.6) 2.1 Subcontracts (1,420.4) (1,138.5) 24.8 Taxes (160.5) (126.2) 27.2 Other net operating income (expense) (74.7) (42.8) 74.7 Gain (loss) on sale of fixed assets 120.6 26.6 n.s. Impairment of goodwill and other assets (3.8) (2.5) 56.2 Operating income before D&A (OIBDA) 3,414.7 2,937.6 16.2 Depreciation and amortization (1,526.4) (1,432.9) 6.5 Operating income (OI) 1,888.3 1,504.7 25.5 Profit from associated companies (9.1) (29.5) (69.1) Net financial income (expense) (317.7) (321.6) (1.2) Income before taxes 1,561.4 1,153.5 35.4 Income taxes (579.9) (406.6) 42.6 Income from continuing operations 981.6 746.9 31.4 Income (Loss) from discontinued 0.1 (29.9) c.s. operations Minority interest (69.4) (45.6) 52.2 Net income 912.2 671.4 35.9 Average number of shares (millions) 4,955.9 4,955.9 0.0 Net income per share 0.184 0.135 35.9 (1) Including work in process. TELEFONICA GROUP CONSOLIDATED BALANCE SHEET Unaudited figures (Euros in millions) March 2005 2004 % Chg Noncurrent assets 49,725.7 46,999.4 5.8 Intangible assets 5,914.9 4,848.7 22.0 Goodwill 6,656.4 4,131.3 61.1 Property, plant and equipment and 23,416.2 24,016.6 (2.5) Investment property Longterm financial assets and other 4,959.4 4,729.8 4.9 noncurrent assets Deferred tax assets 8,778.8 9,272.9 (5.3) Current assets 11,362.3 10,978.1 3.5 Inventories 718.1 437.0 64.3 Trade and other receivables 6,311.5 5,555.4 13.6 Current tax receivable 1,208.9 861.6 40.3 Shortterm financial investments 2,063.5 3,550.0 (41.9) Cash and cash equivalents 1,048.8 571.2 83.6 Noncurrent assets classified as held for 11.4 2.8 304.1 sale Total Assets = Total Equity and Liabilities 61,088.0 57,977.5 5.4 Equity 13,000.2 14,275.8 (8.9) Equity attributable to equity holders of 11,313.5 12,089.6 (6.4) the parent Minority interest 1,686.7 2,186.2 (22.8) Noncurrent liabilities 28,800.0 30,381.2 (5.2) Longterm financial debt 18,113.2 19,781.9 (8.4) Deferred tax liabilities 1,871.5 1,429.7 30.9 Longterm provisions 7,687.9 7,836.5 (1.9) Other longterm liabilities 1,127.5 1,333.1 (15.4) Current liabilities 19,287.7 13,320.4 44.8 Shortterm financial debt 9,455.1 5,450.6 73.5 Trade and other payables 5,488.4 4,909.2 11.8 Current tax payable 1,997.6 1,250.2 59.8 Shortterm provisions and other liabilities 2,341.2 1,710.5 36.9 Liabilities associated with noncurrent 5.4 0.0 N.S. assets classified as held for sale Financial Data Net Financial Debt (1) 23,948.1 (1) Net Financial Debt = Long term financial debt + Other long term liabilities + Short term financial debt - Short term financial investments - Cash and cash equivalents - Long term financial assets and other non-current assets. TELEFONICA GROUP FREE CASH FLOW AND CHANGE IN DEBT Unaudited figures (Euros in millions) January March 2005 2004 % Chg I Cash flows from operations 2,695.2 2,557.8 5.4 II Net interest payment (1) (400.5) (382.8) III Payment for income tax (192.9) (32.5) A= Net cash provided by operating 2,101.8 2,142.5 (1.9) I+II+III activities B Payment for investment in fixed and (937.0) (826.8) intangible assets C=A+B Net free cash flow after CAPEX 1,164.8 1,315.7 (11.5) D Net Cash received from sale of Real 39.3 143.2 Estate E Net payment for financial (906.3) (64.5) investment F Net payment for dividends and (224.0) (304.5) treasury stock (2) G= Free cash flow after dividends 73.8 1,089.9 (93.2) C+D+E+F H Effects of exchange rate changes on 292.4 net financial debt I Effects on net financial debt of 78.6 changes in consolid. and others J Net financial debt at beginning of 23,650.9 period K=JG+H+I Net financial debt at end of period 23,948.1 (1) Including cash received from dividends paid by subsidiaries that are not under full consolidation method. (2) Dividends paid by Telefonica S.A. and dividend payments to minoritaries from subsidiaries that are under full consolidation method and treasury stock. TELEFONICA GROUP RECONCILIATIONS OF CASH FLOW AND OIBDA MINUS CAPEX Unaudited figures (Euros in millions) January March 2005 2004 % Chg OIBDA 3,414.7 2,937.6 16.2 CAPEX accrued during the period (EoP 744.0 619.5 exchange rate) Payments related to commitments (236.4) (233.4) Net interest payment (400.5) (382.8) Payment for income tax (192.9) (32.5) Results from the sale of fixed assets (120.7) (26.6) Investment in working cap. and other (2,043.5) (1,566.1) deferred income and expenses = Net Free Cash Flow after Capex 1,164.8 1,315.7 (11.5) + Net Cash received from sale of Real 39.3 143.2 Estate Net payment for financial investment (906.3) (64.5) Net payment for dividends and treasury (224.0) (304.5) stock = Free Cash Flow after dividends 73.8 1,089.9 (93.2) Note: At the Investor Conference held in October 2003, the concept expected 'Free Cash Flow' 20032006 was introduced to reflect the amount of cash flow available to remunerate Telefonica S.A. Shareholders, to protect solvency levels (financial debt and commitments), and to accomodate strategic flexibility. The differences with the caption 'Net Free Cash Flow after Capex' included in the table presented above, are related to 'Free Cash Flow' being calculated before payments related to commitments (workforce reductions and guarantees) and after dividend payments to minoritaries, due to cash recirculation within the Group. Jan-Mar Jan-Mar 2005 2004 Net Free Cash Flow after Capex 1,164.8 1,315.7 + Payments related to cancellation of 191.3 196.7 commitments Ordinary dividends payment to (0.4) (1.8) minoritaries = Free Cash Flow 1,355.7 1,510.6 TELEFONICA GROUP NET FINANCIAL DEBT AND COMMITMENTS Unaudited figures (Euros in millions) March 2005 Longterm debt 18,603.1 Short term debt including current maturities 9,455.1 Cash and Banks (1,048.8) Short and Longterm financial investments (1) (3,061.4) A Net Financial Debt 23,948.1 Guarantees to IPSE 2000 483.9 Guarantees to Newcomm 47.1 B Commitments related to guarantees 531.0 Gross commitments related to workforce reduction 5,405.0 (2) Value of associated Longterm assets (3) (786.8) Taxes receivable (4) (1,501.0) C Net commitments related to workforce reduction 3,117.2 A + B + C Total Debt + Commitments 27,596.3 Net Financial Debt / OIBDA (5) 1.8x Total Debt + Commitments/ OIBDA (5) 2.0x (1) Short term investments and certain investments in financial assets with a maturity profile longer than one year, whose amount is included in the caption 'Investment' of the Balance Sheet. (2) Mainly in Spain, except 86,0 million euros related to the provision of pension fund liabilities of corporations outside Spain. This amount is detailed in the caption 'Provisions for Contingencies and Expenses' of the Balance Sheet, and is the result of adding the following items: 'Provision for Preretirement, Social Security Expenses and Voluntary Severance', 'Group Insurance', 'Technical Reserves', and 'Provisions for Pension Funds of Other Companies'. (3) Amount included in the caption 'Investment' of the Balance Sheet, section 'Other Loans'. Mostly related to investments in fixed income securities and longterm deposits that cover the materialization of technical reserves of the Group insurance companies. (4) Net present value of tax benefits arising from the future payments related to workforce reduction commitments. (5) Calculation based on annualized OIBDA. TELEFONICA GROUP EXCHANGES RATES APPLIED P&L (1) Balance Sheet and CapEx (2) jan-mar jan-mar mar 2005 mar 2004 2005 2004 USA (US Dollar/Euro) 1.311 1.249 1.296 1.222 Argentina (Euro/ 3.839 3.631 3.782 3.496 Argentinean Peso) Brazil (Euro/Brasilian 3.495 3.619 3.457 3.555 Real) Chile (Euro/Chilean Peso) 757.576 735.294 757.576 751.880 Colombia (Euro/Colombian 3,086.420 3,386.202 3,076.923 3,273.783 Peso) El Salvador (Euro/Colon) 11.468 10.933 11.343 10.696 Guatemala (Euro/Quetzal) 10.108 10.137 9.849 9.912 Mexico (Euro/Mexican Peso) 14.654 13.717 14.641 13.635 Nicaragua (Euro/Cordoba) 21.533 n.d. 21.427 n.d. Peru (Euro/Peruvian Nuevo 4.277 4.338 4.230 4.231 Sol) Uruguay (Euro/Uruguayan 33.156 36.905 33.124 36.305 Peso) Venezuela (Euro/Bolivar) 2,816.901 2,398.844 2,785.515 2,347.008 (1) These exchange rates are used to convert the P&L accounts of the Group foreign subsidiaries from local currency to euros. P&L accounts for subsidiaries that use inflation adjusted accounting criteria (Venezuela), are first converted to US dollars at the closing exchange rate, and then the conversion into euros is made according to the average exchange rate. (2) Exchange rates as of 31/03/05 and 31/03/04. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP The first quarter of 2005 reflected strong growth in the broadband market. Telefonica de Espana Group, which has been the driving force of the market, was the main actor in this growth, promoting its transformation business through its innovative portfolio of services. In this market environment, the intense commercial activity of Telefonica de Espana was aimed at defending is position in the traditional business, and overall at developing broadband services, with main activity focus on Value Added Services as the key element to secure its leadership position in the market. The main actions aimed at the development of broadband services have been the following: â€¢ Launching of new broadband services, where ADSL MINI and Voice over IP (VoIP) services should be noted. ADSL MINI service, which allows Internet surfing and downloading of up to 1GB of information per month at any time of the day for a monthly fee of 29.90 euros; additional downloads are billed at 5 euros for every additional 2GB or fraction thereof, to a monthly maximum of 42 euros. The VoIP service, launched on April with a promotional monthly fee of 2 euros, enables a virtual voice line with an independent numbering from the traditional PSTN/ISDN line for ADSL or Imagenio clients; together with the additional line, an optional voice flat rate for fixed to fixed domestic calls (local, and long distance provincial and interprovincial), on promotion for six euros per month, is also commercialised. Among the Value Added Services launched, 'Solucion ADSL Flexible Negocio' (Business Flexible ADSL Solution), 'Solucion ADSL e-gestion factura' (Billing e- management ADSL Solution) and some sectorial solutions (shoemakers and juridical sectors) are to be mentioned. â€¢ During the first months of the year the Company has progressed significantly on increasing the coverage o Imagenio, TV service over a 6Mbps ADSL connection. By the end of April, Imagenio was available at 104 major Spanish cities, covering over three and a half million households. â€¢ With regards to ADSL promotions, 85.902 new clients benefited from the free ADSL connection fee promotion starting January 26th and ending February 14th, and that did also include free local calls throughout the year 2005; the 25.7% discount on the ADSL monthly fee through 2005 promotion started on February 21st and ended on march 31st. Additionally, the Company has been actively promoting, through an intense commercial campaign, the ADSL Video Supervision service (Video Surveillance ADSL) during the first quarter. Relating the voice and access businesses, the following commercial actions have been undertaken: â€¢ The launch last February of the 'Tarifa de Voz Mini', Mini Voice Rate, which offers the option of making all local, provincial and national calls at a set rate, regardless of their duration, to a maximum of 60 minutes. â€¢ The promotion from February 23rd to March 8th in which the first six months' fees for all new PSTN or ISDN lines signed up during that period were free of charge. 38,476 new clients benefited from this promotion. â€¢ Free connection fee campaign for new PSTN lines during April, recording 62.893 take ups. From a regulatory standpoint, it is very important to note that during the month of April a group of eight bundles of services comprising double play and triple play (2P and 3P) offers were approved by the Spanish Regulator, Comision del Mercado de las Telecomunicaciones, (CMT). Out of these bundles, the one that will be firstly commercialized is a 2P offer of voice plus TV (voice + Imagenio TV), whose launching is expected for May 2005. Equally to be noted, is the CMT authorization enabling the Telefonica de Espana to offer VoIP services, and the cancellation of the restriction on the Company preventing bundling services with priced-in discounts on 3P services including Imagenio TV, broadband Internet access and voice services. Starting on the first quarter 2005, Telefonica de Espana Parent company is publishing revenues breakdown adapted to the strategic corporate vision, in which access is the base for client relations and increases its value through added value services sold. Hence, revenues are to be distributed as follows: â€¢ Traditional Access, including connection and monthly fees â€¢ Traditional Voice Services which include revenues generated by outgoing and incoming (interconnection) voice traffic, voice consumptions, bonuses and handsets sales, voice value added services, and others. â€¢ Internet and Broadband Services, corresponding to revenues generated by the ADSL broadband business, including ADSL access revenues and VAS revenues, loop unbundling and narrowband Internet. â€¢ Data Services, which include the revenues from Virtual Private Networks, Circuits and Broadcasting, as well as wholesale services related to these type of data services. â€¢ IT Services, generated by systems integration and by outsourcing. It is worth noting that revenues previous included in the wholesale business have been distributed among these new categories according to their nature. â€¢ Revenues at Telefonica de Espana Group amounted to 2,842.0 million euros, a 6.0% growth compared to the first quarter of 2004. Telefonica de Espana Parent company registered revenues of 2,737.0 million euros in the first quarter of 2005, growing by 6,4% compared to the first quarter of 2004. Broadband and Traditional Access businesses stand out as main contributors to revenue growth at Telefonica de Espana Parent company, providing each 4.7 percentage points and 1.1 percentage points respectively. â€¢ Revenues from Traditional Access amounted to 707.7 million euros, a 4.1% growth attributable to the accumulated effect of the past two rises of the PSTN monthly fee. The first increase of the monthly fee was of 4.35%, equivalent to 0.55 euros a month, and was implemented on April 1st 2004; it will cease to contribute on revenues growth as of the second quarter of 2005. The second, a 2.0% rise, implemented on January 22nd, will continue to contribute to revenues growth throughout this year. The Spanish access market grew by 1.3% during the twelve months up to march 2005, staying at 87.7% the estimated access market share of Telefonica de Espana at the end of the first quarter of 2005, after having lost 0.5 percentage points of market share since the start of the year, and 2.2 percentage points over the past twelve months. In absolute terms, the loss of lines (PSTN+basic ISDN access) over the quarter stood at 85,133, a slightly greater loss than in previous quarters. It is estimated that April's free connection fee campaign will help offset this loss over the second quarter. Moreover, Traditional Voice Service revenues grew by 1.8% to total 1,283.3 million euros due to the management effort on promoting higher priced traffic (as international long distance) and reducing discount bonuses (on Comprehensive Maintenance Service, SIM). At this point, it is important to note the growth in revenues from outgoing voice traffic (national, international, fixed-to-mobile, intelligent network and other voice consumptions), which amounted to 5.2% despite the 9.8% drop in the volume of traffic processed in minutes. The difference in growth between revenues and traffic volume, which stood at 15.0 percentage points, is mainly due to two factors: The evolution of the traffic mix towards higher priced traffic per minute, explaining around 5 percentage points of the difference in growth, and the change in the accounting criteria on the SIM bonuses, that from April 2004 lower handset sales and others revenues whereas prior to April 2004 they were lowering voice usage revenues; this latter effect, represents around 6 percentage points of the difference in growths and will cease to have an impact as of the second quarter of this year, as already explained in detail during the second quarter of 2004. Amounting to 17.9% of Traditional Voice Service revenues, Interconnection revenues grew by 7.7% to 229.2 million euros, on the back of growing transit traffic carried to mobile networks despite the decline of fixed to fixed interconnection traffic. As regards voice traffic, the estimated total volume of the market in Spain, expressed in minutes, was down 5.0% in the first quarter in comparison with the same period of the previous year. Telefonica de Espana's estimated share of the voice market stood at 67.0% at March end, 1.0 percentage points lower than that recorded in December 2004 and 4.2 percentage points lower than the March 2004 share, and thus improving the behaviour of 2004, when 4.4 percentage points of market share were lost. The estimated total volume of minutes processed by Telefonica de Espana during the first quarter of 2005 amounted to 29,249 million, a 10.7% year& ndash;on-year drop. Total outgoing traffic (including internet), which accounted for 54.6% of total traffic, amounted to 15,965 million minutes and fell by 14.5% compared to the same period of the previous year. Traditional outgoing traffic totaled 11,366 million minutes at March end, down by 9.8% year on year due to the negative performance of the market and the aforementioned loss in market share. The negative trend in traffic continued over the quarter, with significant year-on-year falls in domestic fixed-to-fixed traffic: local traffic was down by 13.2%, provincial traffic by 13.2% and DLD traffic by 10.4%. There was also a 1.0% drop in fixed-to-mobile traffic during this period. Only international traffic maintained a positive trend, with a year-on-year growth of 11.6%, accelerating strongly over the quarter in comparison to the growth of the previous year, as a result of the successful capture of traffic generated by the immigrant population to their countries of origin. The number of outgoing minutes to the Internet amounted to 4,599 million to March and continues to represent a negative year-on- year change, 24.3% during this quarter, mainly as a result of switched internet traffic cannibalisation by broadband ADSL services. Finally, incoming traffic amounted to 13,284 million minutes, a 5.6% drop compared with the same period of the previous year. The total number of preselected lines increased by 23,925 over the quarter, which meant a significant reduction compared with the increase of 83,246 lines recorded during the last quarter of 2004. The total number of preselected lines amounted to 2,403,382 by the end of the first quarter of 2005. â€¢ Revenues from Internet and Broadband Services totaled 424.3 million euros during the quarter, a year-on-year growth of 27.1%. Broadband revenues, at 370.6 million euros, contributed 13.1% of the Telefonica de Espana Parent company revenues and grew by 48.3%, driven by the increased number of ADSL connections in service, particularly retail lines. Retail broadband services recorded revenues of 285.8 million euros, a 46.6% increase. Wholesale broadband services totaled 84.9 million euros. Of these, a little over 88% were from Telefonica's ADSL wholesale services, while the remaining 12% represented those associated to loops unbundling. The broadband market in Spain continued to grow strongly over the quarter to record a net gain of 420,883 new lines, which, despite being a little below the peak recorded in the last quarter of year 2004 (439,994 lines), presents a 54.1% increase on the first quarter of 2004 year. The net gain of Telefonica de Espana retail and wholesale ADSL lines during the first quarter of the year amounted to 282,694 lines, which represented getting 67.2% of the net broadband market gain for the quarter. The total number of these lines has now reached 2,772,807. Telefonica de Espana retail lines also benefited from the acceleration in growth, recording a net gain of 188,568 to give an aggregate total of 1,800,465 retail ADSL lines. The unbundled loops by competitors of Telefonica de Espana in the first quarter of the year were 21,790 as fully unbundled loops and 55,507 as shared loops; the total number of unbundled loops by the end of March being 193,409, of which 100,235 were fully unbundled and 93,174 were shared loops. There was accelerated growth in the net gain of unbundled loops, standing at 77,297 this quarter in comparison with the 43,925 of the previous quarter. In view of this, the Telefonica Group's estimated retail broadband market share stood at 54.2%, 1.3 percentage points down on the end of last year, which reflects a slowdown in market share loss (2.6 percentage points lost in the fourth quarter of 2005) which is attributable to the commercial initiatives undertaken by Telefonica de Espana. The determined push of Telefonica de Espana on ADSL Value Added Services is being backed by their highly acceptance among ADSL retail clients, having 54,3% of them contracted at least one VAS. Soluciones ADSL stand out among all VAS commercialised, with a total of 197.025 operative solutions at the end of the first quarter, showing a 10,6% increase compared to that figure as of 2004 year end. It should be noted that, at the end of march 2005, the total number of operative VAS surpassed 1.5 million, compared to the lower that 1.2 million operative VAS at the end of 2004. With regard to Imagenio service, this first quarter of the year has marked a turning point in its development, it performing solidly in terms of both coverage and clients. A net gain of 13,609 clients was recorded, compared with the 2,438 of the previous quarter, to end the first quarter of 2005 with a total of 19,633. This progress is being upheld, as can be seen by the 32.738 clients with access to Imagenio at the end of April 2005, and the volume of gross adds to the service, which continues to grow at a steady rate and already exceeds 3,500 connections a week. â€¢ Data Services grew by 6.3% to total 261.2 million euros. Virtual Private Network services maintained a steady level of revenues, despite the 3.5% growth in the number of connections. This is due to the pricing pressure exerted by the challenging competitive environment and to technological change. Wholesale circuit rental and transport capacity to other operators drove the growth in this sector, representing 35.5% of the data services total. â€¢ Lastly, Information Technology Services contributed with 60.5 million euros to total revenues, with a 14.9% increase. There are currently 139 client management centres operated by Telefonica, showing a 7.8% increase over December 2004, while the number of hosting servers grew by 11.8%. The lower rate of revenues growth at Telefonica de Espana Group compared to that of Telefonica de Espana Parent company, a difference of 0.4 percentage points, is mainly due to Telefonica Telecomunicaciones Publicas (TTP, Telefonica Public Telecommunications), whose revenues fall by 8.8% in the first quarter of 2005. The 6.0% growth in Revenues recorded during the first quarter of 2004 cannot be extrapolated to the year as a whole, as the contribution to growth of effects such as the 2004 PSTN monthly fee increase, and the decrease of SIM bonuses in April 2004 will cease to exist over successive quarters, as indicated above. Additionally, 2005 Price-Cap formula set at CPI-3% (equals to- 1%) should be completed by the 1st of July 2005, while in 2004 it was fully applied on the 1st of November. Telefonica de Espana continued to develop its operational efficiency program through the 2003-2007 Redundancy Program (E.R.E. 2003-2007). A total of 1,750 employees have requested to join the program by the end of the quarter. Of these requests, a total of 398 layoffs have already been accepted and made effective during the first quarter of 2005, carrying an associated provision of 121.3 million euros. Telefonica de Espana Group's Operating Expenses reflect the commercial efforts the Company is making, and the total figure of 1,709.6 million euros represents a 2.3% year-on-year increase. â€¢ Personnel expenses fell by 9.7% to 647.7 million euros, due to the lower provisions associated to the E.R.E. during the first quarter of 2005. Were these provisions to be excluded in 2004 (121.3 million euros) and 2005 (185.7 million euros), the decrease would stand at 0.9%, 8.8 percentage points below that recorded. This slight reduction, bearing in mind that the company is currently implementing the redundancy plan referred to, is primarily due to two factors: the review of salaries and incentives paid for staff not included in the collective agreement, which took place during the first quarter of 2005 and not the second as in 2004, and the appointing of 290 employees from Telefonica I+D (Telefonica R&D) and other Telefonica Group business lines by the Telefonica de Espana Group to undertake systems integration and outsourcing projects aimed at the business market. Following these appointments, the headcount at the Telefonica de Espana Parent company stood at 34,697 employees at the end of the first quarter, 348 fewer than at the end of 2004 and 1,647 fewer than the 36,344 figure as of March 2004. â€¢ Supplies expenses, which as of this quarter include payments for the interconnection of international traffic (net revenues were previously recorded once these expenses had been eliminated), grew by 10.7% to 710.4 million euros, despite the slight 0.8% rise in interconnection expenses at Telefonica de Espana Parent company, which represented over 67% of its total supplies expenses. Purchases of client equipment for ADSL and Imagenio services, and to a lesser extent, the expenses arising from the provision for Internet access by both services and those allocated to loops unbundling (OBA) in the central offices, are the main effects after the increase in supplies expenses. â€¢ External Services expenses increased by 13.2% to total 304.3 million euros owing to the commercial efforts made in response to the challenging competitive situation and the market developments that have characterized recent months. Commercial expenses at Telefonica de Espana Parent company amounted to 101.1 million euros, a 16.5% increase over the first quarter of 2004. The general effort made by the company to increase revenues and efficiency were reflected in an Operating Income Before Depreciation and Amortization (OIBDA) of 1,191.9 million euros, a 11.9% year-on-year growth. As with personnel expenses, this progress was affected by the provisions allocated to the Redundancy Program for 2004 and 2005. Were the provisions for both years to be excluded, the growth rate would be 5.0%. The OIBDA margin totaled 41.9% during the first quarter of 2005, compared with the 39.7% recorded in the same period of 2004. Were the effect of the Redundancy Plan provision over both quarters to be excluded, the first quarter margin of 2005 would be 4.3 percentage points higher, although this would be 0.5 percentage points down on the first quarter of 2004, as a result of greater commercial efforts during 2005. Telefonica de Espana Parent company OIBDA amounted to 1,189.3 million euros, up 11.7% year on year. CapEx, significantly affected by seasonal behavior and, therefore, not representative of the CapEx expected for the year as a whole, amounted to 248.5 million euros, a 5.4% decrease compared with the first quarter of 2004. TELEFONICA DE ESPANA GROUP SELECTED OPERATING DATA Unaudited figures (Thousands) March 2005 2004 % Chg Fixed telephony accesses (1) 16,258.3 16,479.9 (1.3) Internet and data accesses 5,162.2 4,347.2 18.7 Narrowband 2,094.3 2,368.8 (11.6) Broadband (ADSL) 2,772.8 1,847.3 50.0 Retail (2) 1,800.5 1,194.3 50.8 Unbundled loops (3) 193.4 24.1 n.s. Pay TV 22.1 3.1 n.s. (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access x30; 2/6 Access. Company's accesses for internal use included. (2) Satellite included. (3) Includes fully unbundled loops and shared loops. TELEFONICA DE ESPANA PARENT COMPANY OPERATING REVENUES Unaudited figures (Euros in millions) January March 2005 2004 % Var Traditional Access (1) 707.7 680.1 4.1 Traditional Voice Services 1,283.3 1,261.0 1.8 Domestic Traffic (2) 356.0 370.1 (3.8) Fixed to Mobile Traffic 283.2 283.9 (0.3) International Traffic 111.5 87.8 27.0 Intelligent Network, other voice consumption 62.1 30.8 101.5 and bonusses (3) Interconnection (4) 229.2 212.8 7.7 Handsets sales and others (5) 241.4 275.6 (12.4) Internet Broadband Services 424.3 333.9 27.1 Narrowband 53.7 84.1 (36.1) Broadband 370.6 249.9 48.3 Retail (6) 285.8 194.9 46.6 Wholesale (7) 84.9 55.0 54.3 Data Services 261.2 245.7 6.3 VPN, Leased Circuits and Broadcasting 168.6 173.6 (2.9) Wholesale 92.6 72.1 28.4 IT Services 60.5 52.7 14.9 Total operating revenues 2,737.0 2,573.4 6.4 (1) Monthly and connection fees (PSTN, Public Use Telephony, ISDN and Corporate Services) and Telephone booths surcharges. (2) Local and domestic long distance (provincial and interprovincial) traffic. (3) Intelligent Network Services, Special Valued Services, Information Services (118xy), bonusses and others. (4) Includes revenues from fixed to fixed incoming traffic, fixed to mobile incoming traffic, and transit and carrier traffic. (5) Managed Voice Services and other businesses revenues. (6) Retail ADSL services and other Internet Services. (7) Includes Megabase, Megavia, GigADSL, and local loop unbundling. TELEFONICA DE ESPANA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 2,842.0 2,680.7 6.0 Internal expenditure capitalized in fixed 28.9 29.9 (3.1) assets (1) Operating expenses (1,709.6) (1,671.6) 2.3 Other net operating income (expense) (0.7) 5.8 c.s. Gain (loss) on sale of fixed assets 34.3 25.0 37.1 Impairment of goodwill and other assets (3.0) (4.8) (36.9) Operating income before D&A (OIBDA) 1,191.9 1,065.0 11.9 Depreciation and amortization (569.4) (629.4) (9.5) Operating income (OI) 622.4 435.7 42.9 Profit from associated companies (0.1) (0.2) (25.5) Net financial income (expense) (99.7) (156.6) (36.4) Income before taxes 522.6 278.9 87.4 Income taxes (179.3) (91.0) 97.1 Income from continuing operations 343.4 187.9 82.7 Income (Loss) from discontinued 0.0 0.0 n.s. operations Minority interest (0.1) (0.0) n.s. Net income 343.3 187.9 82.7 (1) Including work in process. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA LATINOAMERICA GROUP Exchange rate evolution had a positive effect on Telefonica Latinoamerica accounts in the first quarter of the year, contributing towards the growth of revenues and Operating Income before Depreciation and Amortization (OIBDA) by 1.1 percentage points, respectively, due to the appreciation of the Brazilian real, the Chilean peso and the nuevo sol against the dollar, which offset the depreciation of the dollar against the euro. At the end of this first quarter, Telefonica Latinoamerica revenues amounted to 1,735.2 million euros, 3.4% higher in constant euros than the figure for the same quarter of 2004 (up 4.5% in current euros), primarily due to the growth of Telesp in local currency (+3.2% due to the higher number of fixed telephony and ADSL accesses, together with the increases in tariffs during the second half of 2004) and of TASA (+11.4% due to the increased volume of ADSL accesses and the good performance of voice traffic). Furthermore, Telefonica Empresas America (TEA) and Telefonica International Wholesale Services (TIWS) also recorded a growth in revenues (up 6.1% and 29.5% in constant euros, respectively), while CTC and TdP revenues remained about stable in local currency (-0.3% and & ndash;0.1%, respectively). Operating expenses, at 932.5 million euros for the quarter, progressed in a controlled manner with a year-on-year growth of 2.8% in constant euros (+4.0% in current euros). By items, growth was recorded in personnel expenses (due to the inclusion of Atrium employees following its acquisition by Telesp in December 2004, the agreed salary increases at TASA and the increased workforce share of profits, recorded at TdP) and in External Services (deriving from greater commercial efforts), which were partially offset by lower supplies and tax expenses. Moreover, Telefonica Latinoamerica registered a net gain on sale of fixed assets amounting to 78.9 million euros, which was mainly attributable to the capital gains generated by the disposal of Infonet, which was finally closed in February 2005. As a result, at March end 2005 Telefonica Latinoamerica Group recorded an Operating Income before Depreciation and Amortization (OIBDA) of 852.3 million euros, 16.8% up on the first quarter of 2004 in constant euros (17.9% higher in current euros, thanks to the positive contribution of exchange rates). During the first three months of the year, Telefonica Latinoamerica's amortization remained at similar levels to those recorded in the same period of 2004, resulting in an Operating Income of 449.6 million euros, 36.7% higher in constant euros than in March 2004. The financial results stood at -61.5 million euros, a 28.6% decrease from the figure as of March 2004, due to the lower financial expenses derived from the debt reduction registered by the companies, and despite having lower financial revenues than the previous year. In addition, the result of exchange rate differences is positive, which reflects the positive evolution of the currencies. As of March 2005, Telefonica Latinoamerica's CapEx was 127.5 million euros, a year-on-year growth of 25.3% in constant terms, primarily due to higher investments in broadband. In line with this volume of investment, Telefonica Latinoamerica's operating free cash flow (OIBDA-CapEx) was 724.8 million euros at March end, a 15.4% growth in constant euros (+16.8% in current euros). By the end of this first quarter, Telefonica Latinoamerica managed 26.6 million accesses, compared with the 25.6 million in March 2004. Retail ADSL accesses present the higher contribution to year-on-year growth, which stands at 80.1% to reach 1.5 million accesses as of March 2005. During the quarter, all the operators sustained their commercial efforts to promote broadband, as well as the various strategies to defend the traditional accesses. The Group's workforce stood at 26,503 employees at March 31st, registering a 1.7% growth vs. March 2004, mainly explained by Telesp, following the acquisition of Atrium. Telesp By the end of the first quarter 2005, Telesp had 15.4 million accesses, 3.1% more than the figure recorded as of March 2004, due to: i) the launch in June 2004 of the economy and super-economy lines (a product targeted at low income customers) and second lines, taking the number of fixed telephony accesses to 12.4 million (+1.1% in comparison to the same period of the previous year) and ii) the significant increase in the number of retail ADSL accesses, to 880,183, resulting in a year-on-year growth of 69.9% thanks to the efforts made over the past year to adapt commercial offerings to client needs. Voice traffic (13,930 million minutes) decreased by 7.9% year on year, particularly due to the cannibalization of the cellular business and to the poor performance recorded by the long-distance market. However, it is worth noting that, thanks to the launch of various commercial initiatives and despite the drop in traffic, Telesp was able to increase its long-distance market share. Hence its share in the domestic intra-state long-distance market stood at almost 89%, 2 percentage points higher year-on-year. In domestic inter-state long-distance, market share stood at around 59% (+8.1 percentage points compared to March 2004), while the international long-distance market share increased by a little over 11 percentage points compared with March 2004 to reach around 52%. These good results were due to good commercial product management, which enabled Telesp to get ahead of the competition. Internet traffic recorded a 18.4% decrease in comparison with the first quarter of 2004, due to the migration of the best internet customers to ADSL services. By the end of March 2005, Telesp recorded revenues of 980.9 million euros, an increase of 3.2% in local currency compared to March 2004, due to the greater number of accesses, the increase in tariffs during the second half of 2004, the good performance of new businesses (SMP and long distance originated outside Sao Paulo, etc.) and the notable progress of value-added and public payphone services, which led to a 2.4% local currency increase in Traditional Business revenues. There was also a notable increase in broadband revenues (+38.7% in local currency) due to the growth in the customer base, which led to a 15.7% local currency increase in internet revenues (Broadband + Narrowband) and contributed 7.0% of the company's revenues. Telesp's operating expenses were 2.1% higher in local currency than in the first quarter of 2004, due to: i) increased external services expenses (+8.0% in local currency), mainly due to increased plant maintenance costs as contracts were renegotiated with suppliers and to more resources devoted to customer services (telesales channel), particularly related to the sale of ADSL services and ii) increased personnel expenses (+14.5% in local currency) following the salary increases and the incorporation of Atrium employees. On the other hand, a 4.5% year-on-year decrease in local currency was recorded in interconnection expenses due to the lower volume of traffic. As a result of this performance in revenues and expenses, the Operating Income before Depreciation and Amortization (OIBDA) stood at 442.6 million euros, with year-on-year growth of 8.0% in local currency. The OIBDA margin totaled 45.1%, 2.0 percentage points up vs. the figure as of March 2004, due to the increase in revenues with higher margins, which was helped by the increase in tariffs and the lower interconnection expenses. Accumulated CapEx as of March 2005 grew by 10.3% year-on-year in local currency to stand at 62.7 million euros, and was mainly focused on developing new products and broadband. The operating free cash flow (OIBDA& ndash;CapEx) increased by 7.6% in local currency in comparison to the first quarter of 2004 to stand at 379.9 million euros, thanks to the rise in OIBDA. Telesp had a workforce of 7,450 employees by March end, a year-on- year increase of 3.8% due to the acquisition of Atrium in December 2004, which contributed with around 250 employees. Telefonica de Argentina As throughout 2004, the stable economic situation continued in Argentina during the first quarter of 2005. Management efforts aligned to a context of greater activity and increased consumer spending enabled the growth in accesses and traffic to continue (3.9% and 4.0% respectively), contributing towards the 11.4% increase in revenues, despite the tariff freeze in place since January 2002. As of March 2005, TASA registered 5.2 million accesses (+3.9% vs. March 04), thanks to the year-on-year increase in fixed telephony accesses (+3.8%) and to the exponential growth in retail ADSL accesses (+157.4% compared with March 2004) to around 158,500. As a result, TASA remains the broadband market leader in the Southern area of Argentina, with a market share of over 76%. Total traffic per line increased by 1.2% with regard to the same period of the previous year, driven by the strong growth in incoming (+35.4% year-on& ndash;year) and Fixed-to-Mobile traffic (33.0%), in line with the country's strong development of the cellular business. The positive performance of the operating variables in terms of accesses and traffic as compared to March 2004 led to revenues of 202.4 million euros, an 11.4% year-on-year increase in local currency. By business, revenues from Traditional Business (accounting for 92% of the total) rose 9.6% year& ndash;on-year driven by the good performance of accesses and traffic, while revenues from the Internet Business (Narrowband + Broadband) rose 36.8% in local currency thanks to expansion of the ADSL accesses, which permitted to double revenues for these services vs. the accumulated to March 2004, offsetting the decline in the narrowband business. The strong growth rate of revenues is coupled with a 21.1% increase in operating expenses in local currency, primarily due to external services (+28.5%) associated to the generation of revenues (customer service and plant maintenance) and to personnel expenses (+30.5%) as a result of applying the salary increases agreed with the unions. The positive performance of operating variables, combined with the ongoing policy of rationalization and cost containment, enabled TASA to achieve an Operating Income before Depreciation and Amortization (OIBDA) of 112.2 million euros, an increase of 1.7% in local currency vs. the one obtained in the first quarter of 2004. The OIBDA margin stood at 55.4%. By the end of this first quarter, CapEx had grown by 66.0% in local currency in relation to the March 2004 figure to stand at 23.9 million euros, of which the development of ADSL accounted for around 28%. Despite the OIBDA growth, the sharp increase in investment, in line with the recovery in activity, resulted in a 7.8% fall in local currency in the operating free cash flow (OIBDA- CapEx) in relation to that obtained in the same period of 2004 to stand at around 88.0 million euros Telefonica CTC Chile On January 1st 2005, part of the product portfolio for the business segment included in the CTC accounts was transferred to the Telefonica Empresas Chile portfolio. The 2004 results have been reclassified so that year-on- year comparisons can be made. Tariff Decree 169 came into force during the first quarter of 2005, as published in the Official Bulletin of February 11th. Hence, the company started to apply the new tariffs retroactively as of May 6th 2004, though this did not result in any significant impact on the company's revenues. CTC registered 3.1 million accesses at the end of March 2005, 0.3% up on March 2004. The year-on-year net gain in fixed telephony accesses stood at around 21,700, primarily due to the launch of prepaid and consumption control products (Economy and Super-Economy Lines). With regard to ADSL accesses, it is worth noting the increase in the retail broadband customers vs. the figure at the end of March 2004, which stands at 51.8% to total close to 194,800 accesses. Following the doubling of speeds in 2004, great efforts are being made to promote sales and reduce churn through the launch of new tariff modalities (Speedy Night & Weekend), ADSL + voice traffic packages and a new offer of satellite TV (Zap TV), etc. Moreover, although the domestic long distance market continued to decline, primarily due to the effect of mobile substitution and Internet, CTC, in line with previous quarters, has increased its market share to almost 46% (a rise of around 1.5 percentage points compared to the end of March 2004). Its market share in the International Long Distance market remained stable at around 31.5%, although this represented a slight fall compared with the same period of 2004. The company's revenues for the first three months of the year amounted to 197.7 million euros, 0.3% lower in local currency than for the same period of 2004. This is explained by the negative performance of the Traditional Business (-2.4% year-on-year in local currency), given that the fall in revenues from monthly fees following the success of prepaid and consumption control products (Economy and Super-Economy Lines, Minute plans, etc.) was not offset by the good performance in traffic revenues, primarily from interconnection. Internet Business revenues (Narrowband + Broadband) grew by 38% in local currency in comparison with the first quarter of 2004 to account for 7.2% of revenues, mostly due to the increase in the broadband business. Operating expenses for the January-March 2005 period fell by 3.1% in local currency compared with the same period of 2004. The main reductions were recorded in personnel expenses (-14.4%), mostly due to the change in accounting criteria for compensation, and supplies (- 8.7%), which recorded decreased equipment rental costs and lower consumption due to the fall in equipment sales. External services, however, grew by 9.6% in local currency, primarily due to greater commercial efforts and the increased installation rate recorded over the period. As a result, the Operating Income before Depreciation and Amortization (OIBDA) for the quarter totaled 87.9 million euros, a 2.3% increase on the previous year in local currency, thanks to the savings recorded in expenses. The OIBDA margin was 44.5%, 1.1 percentage points higher than that recorded in March 2004. The investments made up to the end of March 2005 placed CapEx at 12.3 million euros, which was 13.1% less in local currency than in March 2004, when significant investments were made in ADSL. Broadband services accounted for 27.2% of CapEx. The operating free cash flow (OIBDA-CapEx) generated increased by 5.3% in local currency during the period compared with the first quarter in 2004, to stand at 75.7 million euros. Telefonica del Peru Telefonica del Peru continued with its accelerated growth in the number of accesses during the first quarter of 2005 (+12.8% compared with March 2004), thanks to both the growth in fixed telephony accesses (up 10.1% to reach a total of 2.2 million by the end of March) and the increase in Broadband connections (up by 118.8% year-on-year to reach a plant of 234,660 lines), which was helped by various marketing campaigns. Telefonica del Peru's revenues at the end of the first quarter of 2005 totaled 246.5 million euros, only 0.1% down on that reached in March 2004 despite the unfavorable exchange rate affecting products billed in dollars, including ADSL and cable TV. The growth in revenues from the internet business (Narrowband + Broadband), which stood at around 45% to account for 8.3% of revenues, was unable to completely offset the decline in revenues from the Traditional Business (-2.9% in local currency), which was mainly affected by the negative performance of revenues from outgoing local and domestic and international long-distance traffic. These could not be offset by the growth in interconnection revenues and by the positive performance of public payphone revenues, which grew by 11.1% year on year. Operating expenses recorded a 2.8% rise in local currency in relation to the first quarter of the previous year, primarily due to increased personnel expenses (+20%) basically owing to greater employee profit-sharing and to external services expenses (+6.8%) due to higher commercial activity. However, these increases were partially offset by containing supplies (-10,0%) as a result of lower interconnection expenses. Operating Income before Depreciation and Amortization (OIBDA) stood at 93.5 million euros, a year-on-year fall of 10.4% in local currency primarily due to the provision made for extraordinary contingencies and embargos. The OIBDA margin stood at 37.9%. Excluding the provision for extraordinary contingencies and seizures, the margin would stand at 44.3%, 2 percentage points higher than that reached in the same period of the previous year (42.3%). CapEx increased by 67.7% in local currency as a result of better investment accounting management; hence this increase will be eased over the year. 20% of the total was invested in the Internet Business. The operating free cash flow (OIBDA - CapEx), which stood at 80.2 million euros, fell by almost 17% in local currency due to the decline in OIBDA and the increase in CapEx with regard to the same period of the previous year. TELEFONICA EMPRESAS AMERICA As of January 1st 2005, there was a change in the Telefonica Empresas America consolidation perimeter to consolidate TLD Puerto Rico operations, also including the new segmentation made in Telefonica Empresas Chile. The results from the first quarter of 2005 and those from the same period of 2004 have been calculated in such a manner to ensure they are comparable. The accumulated revenues of Telefonica Empresas America to March 2005 totaled 133.6 million euros, a 6.1% increase in local currency with respect to the same period of 2004, consolidating the growth recorded in 2004. The accumulated Operating Income before Depreciation and Amortization (OIBDA) for the period stood at 20.5 million euros, 4.3% higher in local currency than that obtained in the first quarter of 2004. These increases led to the first positive Operating Income (1 million euros) since the company was formed. TEA continued to generate an operating free cash flow to record OIBDA-CapEx of 14 million euros during the quarter, 5% up on that recorded in March 2004 in constant euros. By companies, Telefonica Empresas Brasil continued to perform well and remained the main contributor of the TEA Group, accounting for 50.1 million euros in revenues with a growth of 24.4% year on year (19.8% in local currency). Its OIBDA margin improved by 2.1 percentage points year on year to total 23.7% in local currency. Its contribution to the group's operating free cash flow amounted to 8.8 million euros, a 16.9% increase on the same period of 2004 (+13.0% in local currency). The results of the other countries concerned (Chile, Argentina and Peru) also improved over the first quarter of 2004. Argentina's revenues increased by 17.4% in local currency (+11.0% in current euros). Following its resegmentation, Telefonica Empresas Chile totaled 27.5 million euros during the quarter, 3.4% higher than in 2004. Telefonica Empresas Peru slightly increased its revenues (+1.1% in local currency) in comparison with 2004, although its OIBDA improved significantly by 26.2% in local currency (+27.6% in current euros). The other countries (Colombia, Mexico and the US) recorded different results. Colombia and Mexico showed worse results than in the first quarter of 2004. Telefonica Empresas operations in Miami were consolidated with the incorporation of the TLD Puerto Rico business, its revenues growing by 12.2% in local currency. By products, revenues from data and Internet remained the most relevant, particularly Virtual Private Networks which showed a clear tendency to evolve towards IP-based solutions, growing by 32% in local currency in relation to 2004. The growth strategy in the business sector is dependent on the level of maturity reached by the Information Technologies line (including the Hosting and Solutions business) and the growth of International Services. Aggregate growth of these business lines during the first quarter reached 6.3% in current euros. TELEFONICA INTERNATIONAL WHOLESALE SERVICES (TIWS) In line with the previous year, TIWS continued to progress in terms of efficiency, increasing its revenues and improving its margins as a percentage of revenues. Along these lines, TIWS recorded a 26.9% growth in revenues to total 42.7 million euros, sales from the international IP services being its main contributor to revenues with a year-on-year growth of 34.6%. In terms of margins, accumulated OIBDA to March 2005 stood at 12.9 million euros, a 119.8% rise in relation to the same period in 2004 and 30.2% of revenues, representing a 12.8 percentage point improvement. GRUPO TELEFONICA LATINOAMERICA DATOS OPERATIVOS Unaudited figures (Thousands) March 2005 2004 % Chg Telesp Fixed telephony 12,356.4 12,218.4 1.1 accesses (1) Internet and data 3,081.1 2,749.3 12.1 accesses Narrowband 2,093.3 2,134.4 (1.9) Broadband (ADSL) 880.2 518.2 69.9 Retail 880.2 518.2 69.9 Telefonica de Fixed telephony 4,368.5 4,209.2 3.8 Argentina accesses (1) Internet and data 852.5 816.7 4.4 accesses Narrowband 618.6 707.1 (12.5) Broadband (ADSL) 209.2 85.3 145.2 Retail (2) 158.5 61.6 157.4 Telefonica CTC Fixed telephony 2,423.2 2,401.5 0.9 Chile accesses (1) Internet and data 635.8 647.3 (1.8) accesses Narrowband 229.6 318.0 (27.8) Broadband (ADSL) 221.9 143.1 55.1 Retail 194.8 128.3 51.8 Telefonica del Peru Fixed telephony 2,201.1 1,999.8 10.1 accesses (1) Internet and data 309.5 216.6 42.9 accesses Narrowband 72.0 106.0 (32.1) Broadband (ADSL) (3) 234.7 107.2 118.8 Retail 234.7 107.2 118.8 Pay TV 406.0 369.7 9.8 T. LATINOAMERICA Fixed telephony 21,349.1 20,828.9 2.5 GROUP accesses (1) Internet and data 4,879.0 4,430.0 10.1 accesses Narrowband 3,013.5 3,265.6 (7.7) Broadband (ADSL) (3) 1,546.0 853.8 81.1 Retail (2) 1,468.1 815.3 80.1 Pay TV 406.0 369.7 9.8 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access x30; 2/6 Access. Companys accesses for internal use included. (2) TASA ISP in the north part of the country included. (3) Cable Modem in Telefonica del Peru included. TELEFONICA LATINOAMERICA GROUP SELECTED OPERATING DATA Unaudited figures (Euros in millions) January March 2005 2004 % Chg Telesp Revenues 980.9 917.9 6.9 OIBDA 442.6 395.8 11.8 OIBDA margin 45.1% 43.1% 2.0 p.p. Telefonica de Argentina Revenues 202.4 192.1 5.4 OIBDA 112.2 116.7 (3.8) OIBDA margin (1) 55.4% 60.7% (5.3 p.p.) Telefonica CTC Chile Revenues 197.7 204.3 (3.3) OIBDA 87.9 88.6 (0.7) OIBDA margin 44.5% 43.3% 1.1 p.p. Telefonica del Peru Revenues 246.5 243.4 1.3 OIBDA 93.5 102.9 (9.1) OIBDA margin 37.9% 42.3% (4.3 p.p.) Telefonica Empresas Revenues 133.6 125.3 6.6 America OIBDA 20.5 19.2 6.9 OIBDA margin 15.3% 15.3% 0.0 p.p. TIWS Revenues 42.7 33.7 26.9 OIBDA 12.9 5.9 119.8 OIBDA margin 30.2% 17.5% 12.8 p.p. Note: OIBDA before management fees. Data for Telefonica de Argentina include the ISP business of Advance, while those of Telefonica del Peru includes CableMagico. (1) Net of fixed to mobile interconnection. TELEFONICA LATINOAMERICA GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 1,735.2 1,659.7 4.5 Internal expenditure capitalized in fixed 8.5 9.5 (10.2) assets (1) Operating expenses (932.5) (896.6) 4.0 Other net operating income (expense) (37.9) (51.2) (26.0) Gain (loss) on sale of fixed assets 78.9 1.3 n.s. Impairment of goodwill and other assets 0.1 0.3 (76.1) Operating income before D&A (OIBDA) 852.3 723.0 17.9 Depreciation and amortization (402.7) (396.6) 1.6 Operating income (OI) 449.6 326.4 37.7 Profit from associated companies 0.0 (0.7) n.s. Net financial income (expense) (61.5) (86.1) (28.6) Income before taxes 388.1 239.6 62.0 Income taxes (114.7) (63.2) 81.4 Income from continuing operations 273.4 176.4 55.0 Income (Loss) from discontinued operations 0.0 0.0 n.s. Minority interest (32.8) (30.9) 6.2 Net income 240.6 145.5 65.4 (1) Including work in process. RESULTS BY BUSINESS LINES Mobile Business With the acquisition of Bellsouth's Latin American operations completed in January, the first quarter of 2005 marked a starting point for Telefonica Moviles in its new dimension: as an operator with a presence in 15 countries with aggregate POPS of over 500 millions, where the operators managed by the Company enjoy solid competitive positions (number 1 or 2 players in the main markets). During the first quarter of 2005 the Group's main markets of operation saw intense commercial activity, driven by the extension of the Christmas campaigns until the first week of January (Three Kings' Day) in most countries, our strategy to capture the growth potential in Latin American markets and as a result of ongoing competitive pressure from other operators. Against this backdrop, Telefonica Moviles ended March with over 81.4 millions managed customers, after registering net adds of 3 million in the first quarter of 2005 Of the total customer base, 59 million corresponded to Latin American operators, 19 million to Telefonica Moviles Espana (TME) and over 3 million to Medi Telecom (Morocco). Key aspects of the first quarter of 2005 results are as follows: â€¢ Year-over-year growth in revenues of 39.3% to 3,676 million euros in the first quarter of 2005, driven by the positive performance in service revenues. Organic1 growth of consolidated revenues stood at 13.8% vs. the first quarter of 2004. -------------------- 1 Organic growth including the consolidation of Telefonica Movil Chile and Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela from 1 January 2004; and assuming constant exchange rates Service revenues totaled 3.201 million euros in the first quarter of 2005 (+41% vs. the first quarter of 2004), while handset sales rose 30% to 479 million euros. By geographical areas, Telefonica Moviles Espana (TME) recorded year- over-year growth of 6.1% in revenues to 2,075 million euros. Of note is the favorable evolution of service revenues, which rose 7% vs. the first quarter of 2004 despite stiffer competitive pressure and the reduction in interconnection tariffs implemented from November 2004. The consolidated Latin American operators recorded operating revenues of 1,603 million euros (+135.0%), with a 17.8 p.p increase in their contribution to the Group total to 43.6%. Organic growth of these operators& rsquo; revenues, assuming constant exchange rates, stood at 25.3% vs. the first quarter of 2004. â€¢ Consolidated Operating income before depreciation and amortization (OIBDA) stood at 1,318 million euros in the first quarter of 2005 (+19.1% vs. the first quarter of 2004). This performance was driven by the intensification of commercial efforts by the Group's operators throughout their markets. Organic2 growth of consolidated OIBDA stood at 1.1% vs. the first quarter of 2004. -------------------- 2 Organic growth including the consolidation of Telefonica Movil Chile and Latin American assets acquired to BellSouth in Argentina, Colombia, Chile, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela from 1 January 2004; and assuming constant exchange rates The consolidated OIBDA margin stood at 35.9%, impacted by increased commercial costs resulting from the operators' strategic efforts to capture a significant part of the growth in Latin America -where total net adds in the first quarter of 2005 were 24% higher than in the first quarter of 2004- and to maintain its competitive position in aggressive commercial environments -which in Spain is marked by the continued strong activity in number portability, which started in 2004. By regions, OIBDA at TME stood at 987 million euros in the first quarter of 2005 (-0.3% vs. the first quarter of 2004), representing an OIBDA margin of 47.5%. OIBDA for the consolidated Latin American subsidiaries, in euros, reached 353 million euros (2.6 times more than in the first quarter of 2004). Organic5 growth of OIBDA for Latin American operations, assuming constant exchange rates, stood at 5.2% vs. the first quarter of 2004. As regards the rest of the main line items, we would highlight: â€¢ 50.7% increase in depreciation compared to the first quarter of 2004, primarily driven by the changes to the Group's consolidation perimeter, including 61 million euros of depreciation of intangible assets related to the acquisition of Telefonica Movil Chile and of the eight Latin American operators acquired to BellSouth in 2004. At the end of the first quarter of 2005 the allocation of the purchase price of the operators acquired to BellSouth in Chile and Argentina in January has not yet been carried out. Such acquisitions have led to an initial goodwill of 659 million euros. The price allocation will be carried out in the following months based upon the conclusions obtained from appraisals carried out by third party independent experts. â€¢ Improvement in income from associated companies, as net losses from companies consolidated by the equity method declined by 31.6% (-8.6 million euros in the first quarter of 2005 vs. -12.5 million euros in the first quarter of 2004). Losses attributable to the Group from its stake in Medi Telecom were 12% lower year-over-year and losses attributable to IPSE 2000 were 39% lower than in the first quarter of 2004. â€¢ Higher negative net financial results, a line item which in the first quarter of 2004 was affected favorably by the evolution of exchange rates, which translated during that quarter into positive net ForEx results registered in intra-group loans. Had the first quarter of 2004 closed with similar exchange rates to those of 4Q04, financial results in the first quarter of 2004 would have changed sign and as a result, the year-on& ndash;year comparison with the first quarter of 2005 would have been positive. The evolution of exchange rates in the subsequent quarters of 2004 meant that for full-year 2004, greater financial expenses were booked under IFRS than under Spanish GAAP. For all of 2004, the results of exchange rate differences on intra- group loans were negative, and therefore the effect of the comparison the first quarter of 2005/the first quarter of 2004 will not be relevant for the full fiscal year 2005. Interest expenses increased 44% from the first quarter of 2004, due to the greater average balance of net debt in the first quarter of 2005 (+106% vs. the first quarter of 2004). Consolidated net financial debt was impacted by the acquisitions made in the second half of 2004 and January 2005 (Telefonica Movil Chile, BellSouth& rsquo;s Latin American operators and the voluntary tender offers for shares in for Brasilcel's subsidiaries). At the end of the first quarter of 2005 consolidated net debt stood at 9,369 million euros (4,565 million euros in the first quarter of 2004), while proportionate net debt stood at 9,999 million euros (4,404 million euros in the first quarter of 2004). â€¢ 39% effective tax rate, mainly affected by operations in Venezuela, where fiscal consolidation does not exist. â€¢ Net income totaled 432 million euros in the first quarter of 2005 (448 million euros in the first quarter of 2004), impacted fundamentally by the higher negative net financial results. â€¢ Consolidated CapEx in the first quarter of 2005 totaled 311 million euros. Regarding the evolution of the Mobile Business of Telefonica Group (including Telefonica Movil Chile since January 1st, 2004), revenues totalled 3,675.9 million euros as of march 05, a year-on-year increase of 34.6% compared to the same period of last year. On the other hand, the Operating Income before D&A (OIBDA) reached 1,317.9 million euros, a year-on- year increase of 16.7%. SPAIN The first quarter of the year was marked by both the end of the Christmas campaigns and the fact that Easter fell at the end of March (when in 2004 it fell in April). As a result, the first three months of 2005 saw a continuation of the intense competitive activity seen in 2004, notably from the second quarter on, especially in number portability actions. By the end of 2005 the market had grown to an estimated 40 million lines, with year-over-year growth of 4.5% and an estimated penetration rate of 90.3% (+3 p.p. vs. the first quarter of 2004). Against this backdrop, TME recorded a strong level of commercial activity during the first quarter of 2005, with a volume of over 2.5 million actions (+12.5% higher than in the first quarter of 2004). The good performance of gross additions in the contract segment, which were up 40% over the first quarter of 2004, is worth highlighting in this context, as a reflection of the Company's growth strategy centered on preserving its leadership in market share of revenues. This evolution, combined with ongoing prepaid to contract migrations (over 210,000 migrations in the first quarter of 2005), have led the contract segment to already represent half of TME's customer base by the end of March, representing an 18 p.p. increase in three years and an 8 p.p. increase in the last year. Moreover, there were over 1 million handset upgrades during the quarter (+23% vs. the first quarter of 2004). TME increased its customer base by over 100,000 lines in the first quarter of 2005, to 19 million. As for usage, traffic carried over TME's networks in the first quarter of 2005 increased by 11% year-over-year to 11,000 million minutes, with a sharp increase in on-net traffic (+13%). MOU stood at 133 minutes in the first quarter of 2005 (+8.9% vs. the first quarter of 2004 in comparable terms). The positive trend in voice usage ratios was significantly affected by the campaign launched in March to boost off- peak calls (named 'Ya Te Llamo Yo3'). More than 850,000 lines have subscribed to this promotion to date. Regarding data services, it is worth highlighting the increasing take-up of content access services, with over 4.2 million customers using e-mocion internet portal during March, with half a million of them using i-mode technology. The number of MMS users stood at 1.4 million by end of March 2005, with monthly average usage levels of over 3 MMS. All of this led to total data and content services revenues of 250 million euros in the first quarter of 2005 (+9% vs. the first quarter of 2004). We should also highlight the good performance shown by roaming-out services, driven by the introduction of the 'Single Global Tariff' at the end of 2004. TME's total ARPU for the first quarter of 2005 stood at 32.9 euros (+4.8% vs. the first quarter of 2004 in comparable terms), with data ARPU contributing 4.4 euros. In addition, the Company has launched a series of new products and initiatives along the beginning of this year aimed at consolidating new revenue growth drivers, such as the following: â€¢ Launch of Ruta movistar, a pioneering service in the world, whereby mobile handsets serve additionally as an advanced online navigation tool, thanks to the incorporation of a GPS device and the browsing software included in the offer. â€¢ Launch of Pagos movistar services, whereby the Company's customers can pay with their mobile phone at food and beverage vending machines located in airports, train stations, shopping centers and universities. â€¢ Launch of Mail movistar Empresas, a new, on-line, e-mail service for corporate customers, having as main novelty its compatibility with mobile handsets using operating systems such as Symbian and Windows Mobile, thereby broadening the range of solutions which allow for handling e -mail on mobility, as proprietary handsets are not required. â€¢ Addition into the UMTS/3G e-mocion portal of the latest Antena 3 Television news, thorough Canal A3 24 Horas, an exclusive news channel powered by Antena 3. This is the first time a national television broadcaster modifies its news content to a mobile telephony format so that it can be viewed by 3G handset users. â€¢ Together with Lotojuegos.com, TME launched a pioneering mobile telephony betting service in Spain and Europe, where customers can use their handsets to make a series of lottery bets, paying for them with the Mobipay service. In parallel with the change of image of the movistar brand, a new product for all residential and professional customers was launched: 'Mi Favorito', which offers the lowest price available in the Spanish market, 1 euro cent per minute, for all voice and video calls to a movistar number of their choice, plus a single and reduced price for SMS and MMS. This product launch clearly underlines the Company's commitment to its customers to provide attractive, simple and innovative products at affordable prices. Highlights of TME's financial results in the first quarter of 2005 include: â€¢ Revenues were 2,075 million euros in the first quarter of 2005, a year& ndash;over-year increase of 6%. The weight of handset sales in total revenues stood at 13%. â€¢ Service revenues continued to show a solid rhythm of growth, increasing 7% year-over-year to 1,815 million euros in the first quarter of 2005. â€¢ Both the sharp increase in commercial activity (12.5%) and the increased weight of number portability actions in total gross adds have impacted in commercial expenses, bringing theweight of subscriber acquisition and retention costs over operating revenues in the first quarter of 2005 to 11.2%, 3 p.p. higher than in the first quarter of 2004. â€¢ Operating Income before depreciation and amortization stood at 987 million euros for the quarter, 0.3% less than a year earlier. Excluding the impact of commercial and advertising costs, OIBDA would have registered year- over-year growth of 7%. â€¢ OIBDA margin stood at 47.5%. â€¢ CapEx in the first quarter of 2005 totaled 135 million euros. TME continues to roll out its UMTS network, with more than 4,100 base stations up to date. MOROCCO Medi Telecom's customer base continued to grow, ending the first quarter of 2005 with 3.2 million customers4 after achieving 297 thousand net adds in the quarter. As regards financial results, revenues in the first quarter of 2005 stood at 92 million euros (+26.8% vs. the first quarter of 2004), driven by increases in the customer base and in traffic. OIBDA totaled 34.7 million euros, leading to an OIBDA margin of 38% (42% in the first quarter of 2004), impacted by the strong commercial activity during the quarter. ------------------------ 4In the first quarter of 2005, TEM's Latam criteria for accounting customers have been applied to Medi Telecom. LATIN AMERICA Brazil The Brazilian market continued to grow strongly in the first quarter of 2005, albeit at a slower pace than in 2004. At the end of March, the penetration rate in Brazil stood at 38% compared to 37% in December 2004 and 28% in March 2004 (41% in Vivo's areas of operation). Against this backdrop, with continued intense competitive pressure by all operators, Vivo has maintained its market leadership, with a customer base of close to 27 million at the end of the first quarter of 2005 (+23.2% year- over-year). The estimated average market share in areas of operation stood at 49%. VIVO continued to focus on high-value customer acquisition and retention, aligning entry barriers in the contract segment to those of its competitors and driving prepaid to contract migrations. This strategy is reflected in the sharp increase in commercial activity in the contract segment, which increased 49% compared to the first quarter of 2004, leading to a 10% increase in contract customers in the first quarter of 2005 vs. the first quarter of 2004, driven by the favorable performance in corporate customers (+31% in the last 12 months) As for customer usage, total MOU in the first quarter of 2005 was 80 minutes (93 minutes in the first quarter of 2004), impacted mainly by the evolution shown by incoming MOU. Total ARPU for the quarter reached 29 reais (35 reais in the first quarter of 2004). The trend in year-over-year usage ratios continues being shaped by the growth in the total customer base, driven by the prepaid segment - which accounted for 80.3% of total customers at the end of the first quarter of 2005 compared to 77.9% in the first quarter of 2004 - traffic promotions and the impact on incoming traffic of the blocking of fixed-to- mobile calls by fixed-line operators. In addition, right planning in contract prices, due to stronger aggressiveness by competitors, must be taken into account. Data services continued to perform well, with data revenues representing 5.5% of Vivo's total service revenues in the first quarter of 2005 (vs. 4.4% in the first quarter of 2004). Even more remarkable is the fact that more than 25% of these revenues were accounted for by downloads and browsing, highlighting the increasing use of internet access services and Vivo ao Vivo downloads. Regarding Vivo's financial results, the first quarter of 2005 revenues grew 1.9% year-over-year in local currency, boosted by service revenue growth (+5.2%), which was partly offset by lower handset sales. Operating income before depreciation and amortization totaled 142 million euros in the first quarter of 2005, leaving an OBIDA margin after management fees of 38.3% (40.5% in the first quarter of 2004). Year-over-year performance of both indicators is affected mainly by the increase in commercial and call centre costs, as a result of the intense competitive environment and Vivo's strategic focus on high-value segments. Finally, CapEx in the first quarter of 2005 stood at 77 million euros, driven by increased capacity of the operators' networks and by the ongoing rollout of Vivo's 1xRTT and EV-DO networks. Northern region Mexico The Mexican market was marked by intense commercial activity in the first quarter of 2005, during which Telefonica Moviles Mexico (TMM) extended its Christmas campaign until the first week of January (Three Kings' Day). These campaigns resulted in net adds at TMM of 422 thousand new customers during the quarter, representing a sharp year-over-year increase of 33% vs. the first quarter of 2004 TMM ended the first quarter of 2005 with over 6 million customers (+7.5% vs. 4Q04 and +61% vs. the first quarter of 2004), consolidating its position in the Mexican market, with an estimated market share of 15%. The performance of GSM net adds, driven by our service offerings, continued to be the main driver of customer growth. As of March 2005, GSM customers accounted for 78% of the total customer base, compared to 72% in December 2004. Within this context, MOU in the first quarter of 2005 stood at 54 minutes (61 in the first quarter of 2004), while ARPU was 151 Mexican pesos (174 in the first quarter of 2004). The trend in usage ratios compared to the first quarter of 2004 reflects accelerated growth, as well as quarterly seasonality (as Easter holidays in 2004 fell in April). Regarding financial results, revenues grew 36.5% year-over-year in local currency vs. the first quarter of 2004, boosted by handset sales and service revenue growth (+27% vs. the first quarter of 2004), driven by the larger customer base. Operating losses before depreciation and amortization in the first quarter of 2005 (49 million euros) were in line with those recorded in the first quarter of 2004 (47 million euros), despite a 60% year-over-year increase in commercial activity. TMM's GSM network now reaches 279 cities (vs. 248 at the end of 2004). Andean Region Venezuela The Venezuelan mobile market posted strong growth in the first quarter of 2005, driven by the improvement in the country's economic indicators (with lower inflation in the first quarter of 2005 than in the first quarter of 2004), along with the campaigns oriented to capturing market growth. At the end of March 2005, the estimated penetration rate was 34%, up from 30% in December 2004 and surpassing initial expectations. In this context, TM Venezuela's customer base stood at 4.6 million at the end of the quarter, having registered 269 thousand net adds in the first quarter of 2005, with a significant growth in service revenues. In spite of intense commercial activity during the first quarter of 2005, the Company continues holding a solid OIBDA margin, standing at 40.7% and recording operating income before depreciation and amortization of 106 million euros during the quarter. Colombia Despite the seasonality typical of the first quarter of the year, the growing pace of commercial activity was maintained in Colombia during the first quarter of 2005, bringing the estimated penetration rate to 27% (vs. 23% in 2004) Customer acquisition initiatives at TM Colombia were ongoing in the first quarter of 2005, continuing with the increase shown during the 2004 Christmas campaigns. Thus, net adds in the first quarter of 2005 surpassed 400 thousand customers, bringing the total customer base to 3.7 million. Regarding financial results, the OBIDA margin was impacted by the high level of commercial activity in the quarter, standing at 19.7%. Peru Telefonica Moviles' combined customer base in Peru -the aggregate of Telefonica Moviles Peru and the BellSouth operator acquired in October 2004& ndash;totaled nearly 3 million customers at the end of March 2005. Net adds for the quarter were 102 thousand, with another quarter of positive performance by the contract segment, which accounted for 22% of total net adds in the first quarter of 2005. Regarding financial results, it is worth pointing out that the results for the first quarter of 2005 include the contribution by the BellSouth operator acquired in October 2004. Revenues of our operations in Peru stood at 83 million euros in the first quarter of 2005, boosted by the growth in the customer base and higher traffic. It must be taken into account that service revenues are negatively impacted by lower incoming traffic from fixed lines and the reduction in fixed-to& ndash;mobile termination tariffs. The OIBDA margin was 31.5%, despite higher initial costs driven by the co- existence of two networks, underpinned by the seasonality in commercial activity typical of the first quarter Southern Cone Region Argentina The strong growth of Argentine cellular market seen in 2004 continued in the first quarter of 2005, leading to an estimated penetration rate at the end of March of 38%, compared to 34% in December 2004. Following the completion of the acquisition of BellSouth's operator in Argentina in January 2005, Telefonica Moviles has consolidated its position in the Argentine market. As a result, the total customer base at the end of March 2005 stood at over 6 million, with net adds during the quarter of 419 thousand. Regarding commercial activity, it is worth highlighting the ongoing increase in the contract segment, as a driver for customer growth. At the end of the first quarter of 2005, the contract segment represented over 40% of the total customer base. Regarding financial results, revenues for operations in Argentina reached 205 million euros in the first quarter of 2005, boosted by the strong growth in the customer base and traffic. Operating income before depreciation and amortization (24 million euros) was affected by the intense commercial activity during the quarter -which in the first quarter of 2005 nearly doubled the combined commercial activity of BellSouth and Unifon in the first quarter of 2004-, by the strong competitive pressure as well as the costs associated with the rollout of the GSM network. Also of note is the impact of the integration costs of the two operators managed by Telefonica Moviles. As a result, the OIBDA margin stood at 11.9% in the first quarter of 2005. Finally, CapEx was 17 million euros in the first quarter, driven by the ongoing rollout of the GSM network in the first quarter of 2005. Chile Telefonica Moviles maintained its leadership position in the Chilean market in the first quarter of 2005, with a combined customer base -the aggregate of Telefonica Moviles and the BellSouth operator acquired in January 2004- of 4.9 million customers and an estimated market share of 50%. Net adds in the first quarter of 2005, a quarter marked by seasonality in commercial activity, totaled 156 thousand. Revenues for operations in Chile reached 138 million euros in 1T05, while the OIBDA margin was 25.1%, affected by the integration costs of the two operators managed by Telefonica Moviles, as well as by the rollout of the GSM network. CELLULAR BUSINESS SELECTED OPERATING DATA: CELLULAR CUSTOMERS Unaudited figures (Thousands) March March 2005 % Chg 05 2005 % Chg 05 /04 /04 Telefonica 19,077 n.c. TEM Mexico 6,061 60.7% Moviles Espana (1) Contract 9,479 n.c. Contract 269 21.3% Prepaid 9,599 n.c. Prepaid 5,792 63.1% Brasilcel 26,959 23.2% TEM Chile 4,907 96.3% Contract 5,308 9.6% Contract 831 88.5% Prepaid 21,650 27.1% Prepaid 4,077 97.9% TEM Argentina 6,155 212.4% TEM Venezuela 4,595 n.c. Contract 2,501 293.0% Contract 306 n.c. Prepaid 3,440 157.9% Prepaid 3,748 n.c. Fixed Wireless 214 n.c. Fixed Wireless 540 n.c. TEM Peru 2,971 81.8% TEM Colombia 3,699 n.c. Contract 519 71.2% Contract 969 n.c. Prepaid 2,378 78.6% Prepaid 2,730 n.c. Fixed Wireless 74 n.c. TEM Ecuador 1,318 n.c. TEM El Salvador 406 50.2% Contract 286 n.c. Contract 77 20.2% Prepaid 1,029 n.c. Prepaid 314 52.5% Fixed Wireless 3 n.c. Fixed Wireless 15 n.c. TEM Panama 709 n.c. TEM Guatemala 803 324.3% Contract 59 n.c. Contract 75 64.4% Prepaid 650 n.c. Prepaid 614 327.6% TEM Nicaragua 316 n.c. Fixed Wireless 114 n.c. Contract 42 n.c. Medi Telecom 3,221 57.7% Prepaid 257 n.c. Contract 135 2.8% Fixed Wireless 16 n.c. Prepaid 3,086 61.5% TEM Uruguay 241 n.c. Contract 54 n.c. Prepaid 187 n.c. Total Managed 81,438 50.3% (1) Costumer base net of 1.3 million inactive prepaid SIM cards no longer included in the reported costumer base. For reporting purposes and regarding all the operating metrics this adjustment has been made from 1 April 2004, in accordance with the decision adopted by the Company as of June 2004. Note: The annual comparison is affected by the incorporation of TM Chile from August 2004 and the operators acquired from BellSouth in Latin America since october 2004 (Argentina and Chile since January 2005). Note: Since the cancellation of Movistar Puerto Rico's management contract in September 2004 , its subscriber base is excluded from the Group subscriber base. TELEFONICA MOVILES GROUP SELECTED FINANCIAL DATA Unaudited figures (Euros in millions) January March 2005 2004 % Chg Spain Revenues 2,075.2 1,955.8 6.1 OIBDA 986.5 989.9 (0.3) Latin America Revenues 1,602.7 681.9 135.0 OIBDA 353.0 134.6 162.2 Brazil Revenues 370.7 351.3 5.5 OIBDA 141.9 142.5 (0.4) Northern Region Revenues 313.9 204.5 53.4 OIBDA (20.1) (41.0) (50.9) Andean Region Revenues 565.8 56.1 n.c. OIBDA 169.3 14.3 n.c. Southern Cone Revenues 352.3 70.0 n.c. OIBDA 61.9 18.9 n.c. Rest and intragroup sales Revenues (2.0) 0.8 c.s. OIBDA (21.5) (17.8) 21.0 TOTAL Revenues 3,675.9 2,638.5 39.3 OIBDA 1,317.9 1,106.8 19.1 Note: The annual comparison is affected by the incorporation of TM Chile from August 2004 and the operators acquired from BellSouth in Latin America since october 2004 (Argentina and Chile since January 2005). TELEFONICA MOVILES GROUP CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 3,675.9 2,638.5 39.3 Internal expenditure capitalized in fixed 21.1 11.3 87.6 assets (1) Operating expenses (2,347.7) (1,537.5) 52.7 Other net operating income (expense) (29.4) (6.8) n.s. Gain (loss) on sale of fixed assets (1.0) (0.1) n.s. Impairment of goodwill and other assets (0.9) 1.4 c.s. Operating income before D&A (OIBDA) 1,317.9 1,106.8 19.1 Depreciation and amortization (527.6) (350.2) 50.7 Operating income (OI) 790.3 756.6 4.5 Profit from associated companies (8.6) (12.5) (31.6) Net financial income (expense) (74.0) (13.2) n.s. Income before taxes 707.8 730.9 (3.2) Income taxes (276.3) (277.1) (0.3) Income from continuing operations 431.5 453.7 (4.9) Income (Loss) from discontinued 0.0 0.0 n.s. operations Minority interest 0.6 (5.6) c.s. Net income 432.1 448.2 (3.6) (1) Including work in process. CELLULAR BUSINESS CONSOLIDATED INCOME STATEMENT Unaudited figures (Euros in millions) January March 2005 2004 % Chg Revenues 3,675.9 2,730.0 34.6 Internal expenditure capitalized in fixed 21.1 11.3 87.6 assets (1) Operating expenses (2,347.7) (1,605.8) 46.2 Other net operating income (expense) (29.4) (7.8) n.s. Gain (loss) on sale of fixed assets (1.0) (0.1) n.s. Impairment of goodwill and other assets (0.9) 1.4 c.s. Operating income before D&A (OIBDA) 1,317.9 1,129.0 16.7 Depreciation and amortization (527.6) (373.1) 41.4 Operating income (OI) 790.3 755.8 4.6 Profit from associated companies (8.6) (12.5) (31.6) Net financial income (expense) (74.0) (21.4) c.s. Income before taxes 707.8 721.9 (2.0) Income taxes (276.3) (276.7) (0.1) Income from continuing operations 431.5 445.2 (3.1) Income (Loss) from discontinued 0.0 0.0 n.s. operations Minority interest 0.6 (0.8) c.s. Net income 432.1 444.5 (2.8) Note: Cellular Bussines included Telefonica Movil Chile in 2004. (1) Including work in process. This information is provided by RNS The company news service from the London Stock Exchange

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